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Beyond Generic Risk Mitigation

Toyota – which has been lauded as the benchmark of supply chain resilience – has just announced a 40% reduction in global output.

As a catalysing supply chain risk event, Covid occupies a unique place in history. As we approach the end of 2021 and two years after the advent of the virus, supply chain issues continue to worsen.

Manufacturers, ports and freight operators have had their resilience slowly eroded.  They are now succumbing to the continued pressure, and we are realising that global supply chain failures are only now starting to bite.

Businesses buoyed by the belief that the worst is behind them would be well advised to take heed of the massive red flag that Toyota’s reduced production advice represents.

Few B2B companies, with a well-defined customer segmentation, would think TV or billboard advertising is a prudent or efficient use of budget. While they might achieve some results, as mass-reach medium’s they are an expensive way to reach a small, identifiable, target segment that could be reached with much greater efficiency using more targeted approaches.

Similarly, in the context of supply chain risk, generic risk mitigation measures, such as supplier diversification, onshoring, or nearshoring, without good reason, might achieve supply chain resilience, but it could also be a spectacular waste of money.

Cookie-cutter solutions ignore how different companies are

Unfortunately, since the beginning of the pandemic, this has been the advice from many pundits. There’s been a burgeoning number of articles entitled something along the lines of ‘seven supply chain risk mitigations all company’s should put in place’. The reality is this generic advice is useless. These articles are little more than clickbait, offering a neatly packaged solution to a problem that can’t possibly be defined, as each company’s circumstances are unique.

Without considering the context and objectives of individual supply chains, how can any pundit recommend that sourcing a supplier in a different geography or building a buffer for example, reduces supply risk? Sure, building a buffer will mean that a business has more stock on hand, but without knowing what product lines to buffer, in what quantity, and where to position the buffer, businesses risk wasting significant money potentially doing nothing more than building up inventory.

Just like the advertising analogy, supply chain risk mitigation measures should be as targeted as possible. What if your business could identify a single point in its supply chain that’s the source of 90% of its risk? That would be a no-brainer. While unfortunately supply chains are inherently more complex than this, the principle of identifying the greatest sources of risk to your organisational objectives to enable the targeted application of risk mitigation, is sound.

This point about organisational objectives is important. A number of organisations spend a significant amount of time focussing risk efforts on their largest supplier under the false belief that spend and risk are the same. These are the organisations that overlook the $50 widget that can bring its operations to a halt. The biggest risks can be harboured in the smallest quarters.

The terrain is clearer when you have a map

It’s for this reason that every unique supply chain must be thoroughly understood. While many businesses might baulk at the upfront effort, mapping your supply chain with as much granularity as possible will enable decisions that could avert disaster down the track. Analysing how each component of the supply chain could fail – including indirect suppliers, port operators, freight companies and even non-state actors, such as unions or even terrorists – provides clear line of sight to those components that pose the biggest risk to overall failure.

This is the same approach reliability engineers take to the design of nuclear power facilities, and while there may be no need to analyse a supply chain down to the performance of an individual forklift, adopting these reliability techniques can provide powerful insight into the vulnerabilities of a supply chain.

Understanding where the supply chain risk is coming from is an essential foundational activity for developing effective and targeted resilience measures. Now, when we look back at supplier diversification, we can understand which supplier should be diversified and what impact that will have on risk. When we think about buffering, we can determine exactly what lines should be buffered, in what quantity, and where the buffer should be positioned.

Our new reality is that supply chain risk is with us for good. Moreover, the hyperbole of throwing away lean and replacing with fully agile supply chains is meaningless. The supply chain of the future must be both efficient and resilient, and this can only be achieved through the targeted and effective application of resilience measures, underpinned by a granular view of the supply chain.